Income protection cannot take an umbrella approach 

Insurance is not a one size fits all

Sean Hanlon, BrightRock Executive Director: Sales and Distribution 

As a financial adviser, you can play an invaluable role to help ensure financial sustainability for your client through a needs-matched product that is unique to them. But how much income protection cover is enough, and how should it pay out?

Current financial analysis tools consider a client’s current income, expected annual inflation and the time that they still have before they retire to determine a suitable lump sum amount that represents the present value of the client’s financial need for the remainder of their working life. Capital disability cover that pays out a single lump sum amount is still the most widely sold solution in the market for income protection needs. However, structuring this cover to meet the client’s needs at the claim stage is not as simple as it may seem. 

Finding the balance 

Lump-sum products are not always suited to the client’s actual needs, especially as the client’s needs may change over time. In the case of a client becoming permanently disabled without any impact on their life expectancy (for example, becoming deaf), they will face the very real prospect of not having enough money for the full duration of what would have been their income-earning years if they can’t invest this once-off payment to generate the income that they need. If the lump-sum amount falls short or investment returns are unfavourable due to adverse market conditions, this could mean years or even decades without enough to live on. 

Lump-sum cover also generally contains significant premium waste, as it is structured to keep growing at a set rate for a set period, even though clients’ income needs until they retire decrease in line with the number of pay cheques that they still expect to receive. While the lump sum suggested by the FNA tool is accurate at the time of purchase, after a period of time it simply does not match the needs of a client. 

Lump-sum cover also groups various insurance needs into a single cover amount, not taking into account the fact that the underlying needs being covered are different and exist for differing terms. For example, a lump sum will be in place until a client is 65, but some of the needs it covers – such as a mortgage bond or children’s educational costs – would exist for a far shorter period. Because of this, clients end up paying more from day one for cover they don’t need for nearly as long. The cost of insurance can be significantly decreased if each need is covered appropriately for the correct term.

Insurance isn’t a one size fits all product

When it comes to insurance cover, everyone has different circumstances that are distinct from the next person. Their lives, needs and the people they love and want to protect all vary. This is why financial advisers play such a crucial role in helping to advise clients. The idea is to have insurance products that are designed to empower a client and financial adviser, that can enable the co-creation of the most suitable money solutions to suit the specific needs and horizons of each individual.

Our industry needs to develop more sophisticated quoting systems, analysis tools and risk protection solutions that can not only calculate a lump sum but can ensure that a client correctly allocates their income protection cover to the different needs that are important to them. Just as clients allocate their monthly income to different financial needs within a manageable household budget, they should be able to cover their childcare needs, debt repayments and general household expenses through a sophisticated income protection solution. A client should, with the help of their financial adviser, be able to control when and for how long they require cover for certain needs. By determining the appropriate periods that cover is required for, advisers can help clients remove waste, making cover affordable, while ensuring that clients’ needs are taken care of, at the right time.  

In times of economic turmoil and inflation, a client should feel that they are in the driving seat and have better control over their income protection – they should be able to select to receive either a lump sum or a monthly pay-out rather than being forced into one choice. It also becomes crucial in the current inflationary environment that a client has an accurate indication of their future cover projections, the present value of their future income stream, and how they can change their cover to suit their changing needs over time. 

These are the principles that underpin needs-matched solutions and that we believe our industry can no longer ignore.

Lift out: Lump-sum products are not always suited to the client’s actual needs

• A needs-based approach to financial planning ensure the client’s financial plan changes as their needs change
• For a needs-based approach to work you need products that can adapt to the changing needs of the client
• Balance the plan with lump sum benefits and monthly income benefits
• Income protection cover needs to be allocated correctly according to the different needs of the client
• It’s up to the insurance industry to create the products and quoting systems that will make the above possible for advisers